HOUSTON - U.S. regulators changed the rules for reporting oil and natural gas reserves to increase transparency for investors, but the added flexibility for energy companies may leave Wall Street with an obscured view.
Nearly everyone agrees new regulations from the Securities and Exchange Commission were sorely needed. But the changes -- the first in nearly 30 years -- allow companies to book reserves that are less likely to be produced.
Some worry that companies might be too aggressive when booking reserves under the new rules. Added uncertainty may mean more risk for investors looking at reserve growth as an indicator of a company's health and future cash flow.
"It's one of those things where the good thing is that we are going to get a little more information," Phil Weiss, energy analyst at Argus Research, said. "The bad thing is, when your data starts to include more assumptions, there is more risk."
Data on reserves booked under the new regulations will be reported in 2009 results and annual SEC filings.
Under the old rules, companies booked proved reserves, or the recoverable oil and gas from known reservoirs. Under the new rules, companies can also report the less certain "probable" and "possible" reserves.
The government also revised the definition for undrilled -- or undeveloped -- proved reserves (PUDs) that are located beyond the immediate vicinity of existing wells.
The new definition allows companies to book those PUDs that they believe have a "reasonable certainty" to produce rather than old of definition requiring a "certainty" to produce.
COST COMPARISONS
Because of the SEC's changes, year-end reserves reported by individual companies could vary widely, rendering some financial comparisons used by Wall Street analysts less meaningful.
Mark Papa, the chief executive officer of EOG Resources Inc (EOG.N), took time during the company's third-quarter earnings call to say he believes the SEC's reserve reporting will take away an important yardstick for investors.
"It is our belief that the new PUD booking rules provide a much larger amount of flexibility than previously was permitted," Papa said last month.
"Hence you can expect to see big variations in PUD bookings across companies, making it difficult for analysts to make comparisons between companies reporting proved reserve replacement rates and finding costs," the executive said.
Because energy exploration and production companies are unable to set prices for what they sell -- oil and natural gas -- those with a lower cost structure have an edge on rivals.
"All things being equal, I'd rather have the company with the lower costs," Argus's Weiss said.
But John Lee, an expert on oil and gas reserves from Texas A&M University's petroleum engineering department, said the SEC has worked to ensure companies will not report a big jump in PUDs.
"There was a lot of concern that some companies would have huge increases in the PUDs and include wells that they couldn't drill for years," Lee said. "But I don't think it's going to be an enormous amount like some expected. I see it as a positive for investors because they get to see more of a company's resources."
LAWSUITS?
The SEC will also allow companies to report probable and possible reserves, or reserves that have a much lower chance of producing oil and gas, or even getting drilled.
"Proven is really quite a strict definition," Robert Plummer, an analyst with energy consulting firm Wood MacKenzie, said. "It's very safe for investors. You know exactly what you are getting."
But some caution that the reporting of probable and possible reserves, which may not amount to anything, leaves companies more vulnerable to shareholder lawsuits.
"In the case of probable and possibles, there is an increased chance of litigation," Texas A&M's Lee said.
Larger companies may be less likely to report the less certain reserves because it exposes their resource base to taxing authorities, analysts said.
By contrast, smaller companies, which need to show investors potential reserve growth, are the likely candidates to report probable and possible oil and gas reserves.
Still, the new reporting requirements offer investors "a lot more transparency on longer-term, higher-investment projects," Plummer said.
Danny Weingeist, co-managing partner at Kayne Anderson Energy funds, told a recent conference in Houston that investors should not focus too sharply on the various reserve definitions because at the end of the day, companies are paid primarily for their proved reserves.
"People seem to get too hung up on reserve definitions," Weingeist said. "Our investors seem to focus on proved,"
Nearly everyone agrees new regulations from the Securities and Exchange Commission were sorely needed. But the changes -- the first in nearly 30 years -- allow companies to book reserves that are less likely to be produced.
Some worry that companies might be too aggressive when booking reserves under the new rules. Added uncertainty may mean more risk for investors looking at reserve growth as an indicator of a company's health and future cash flow.
"It's one of those things where the good thing is that we are going to get a little more information," Phil Weiss, energy analyst at Argus Research, said. "The bad thing is, when your data starts to include more assumptions, there is more risk."
Data on reserves booked under the new regulations will be reported in 2009 results and annual SEC filings.
Under the old rules, companies booked proved reserves, or the recoverable oil and gas from known reservoirs. Under the new rules, companies can also report the less certain "probable" and "possible" reserves.
The government also revised the definition for undrilled -- or undeveloped -- proved reserves (PUDs) that are located beyond the immediate vicinity of existing wells.
The new definition allows companies to book those PUDs that they believe have a "reasonable certainty" to produce rather than old of definition requiring a "certainty" to produce.
COST COMPARISONS
Because of the SEC's changes, year-end reserves reported by individual companies could vary widely, rendering some financial comparisons used by Wall Street analysts less meaningful.
Mark Papa, the chief executive officer of EOG Resources Inc (EOG.N), took time during the company's third-quarter earnings call to say he believes the SEC's reserve reporting will take away an important yardstick for investors.
"It is our belief that the new PUD booking rules provide a much larger amount of flexibility than previously was permitted," Papa said last month.
"Hence you can expect to see big variations in PUD bookings across companies, making it difficult for analysts to make comparisons between companies reporting proved reserve replacement rates and finding costs," the executive said.
Because energy exploration and production companies are unable to set prices for what they sell -- oil and natural gas -- those with a lower cost structure have an edge on rivals.
"All things being equal, I'd rather have the company with the lower costs," Argus's Weiss said.
But John Lee, an expert on oil and gas reserves from Texas A&M University's petroleum engineering department, said the SEC has worked to ensure companies will not report a big jump in PUDs.
"There was a lot of concern that some companies would have huge increases in the PUDs and include wells that they couldn't drill for years," Lee said. "But I don't think it's going to be an enormous amount like some expected. I see it as a positive for investors because they get to see more of a company's resources."
LAWSUITS?
The SEC will also allow companies to report probable and possible reserves, or reserves that have a much lower chance of producing oil and gas, or even getting drilled.
"Proven is really quite a strict definition," Robert Plummer, an analyst with energy consulting firm Wood MacKenzie, said. "It's very safe for investors. You know exactly what you are getting."
But some caution that the reporting of probable and possible reserves, which may not amount to anything, leaves companies more vulnerable to shareholder lawsuits.
"In the case of probable and possibles, there is an increased chance of litigation," Texas A&M's Lee said.
Larger companies may be less likely to report the less certain reserves because it exposes their resource base to taxing authorities, analysts said.
By contrast, smaller companies, which need to show investors potential reserve growth, are the likely candidates to report probable and possible oil and gas reserves.
Still, the new reporting requirements offer investors "a lot more transparency on longer-term, higher-investment projects," Plummer said.
Danny Weingeist, co-managing partner at Kayne Anderson Energy funds, told a recent conference in Houston that investors should not focus too sharply on the various reserve definitions because at the end of the day, companies are paid primarily for their proved reserves.
"People seem to get too hung up on reserve definitions," Weingeist said. "Our investors seem to focus on proved,"
